Effects of Audit Committee on Fraudulent Financial Reporting Among Listed Firms in Kenya.

Abstract

Fraudulent financial reporting poses significant risks to the integrity of financial markets, investor confidence, and the overall economy. As a result, effective corporate governance mechanisms are crucial in mitigating the occurrence of fraudulent activities. The audit committee, as a key component of corporate governance, plays a vital role in overseeing financial reporting and providing assurance on the reliability of financial statements. This paper aims to explore the effects of audit committee characteristics on fraudulent financial reporting of listed firms in Kenya. Specifically, the study assessed the effect of Audit Committee; gender, financial expertise, size and independence on fraudulent financial reporting. The study was anchored on the Fraud Pentagon theory. Explanatory research design and longitudinal research design was employed in this study where secondary panel data was obtained through content analysis from audited financial statements spanning from 2012 to 2021. The study targeted listed firms in Kenya during the study period and only firms that met the inclusion and exclusion criteria were retained. After applying the inclusion/exclusion criteria only 40 firms formed the study population. Data was analyzed using descriptive and inferential statistics with the significance of each independent variable being tested at 95% confidence level. The findings show that Gender (β1 = -.1154, p=.000.05) and Financial expertise (β2 = -.200, p=.000.05), Size (β3 = -.1457, p=.001.05), and Independence (β4 = -.1818, p=.000.05) had negative and significant effect on fraudulent financial reporting on firms in Kenya. Thus, the study concluded that audit committee characteristics such as gender variability, audit committee size, audit committee financial expertise and audit committee independence significantly influence fraudulent financial reported among listed firms in Kenya. Based on the findings, the study recommends enhancing the effectiveness of the audit committee in preventing fraudulent financial reporting, organizations should strive for gender diversity within the committee. This can be achieved by actively seeking and appointing qualified female candidates to the audit committee. Promoting diversity ensures a range of perspectives and experiences, leading to more robust discussions, increased scrutiny of financial reporting practices, and improved decision-making. Secondly, Organizations should prioritize the independence of the audit committee by ensuring that committee members are free from any conflicts of interest and have no direct ties to management. Additionally, Organizations should carefully consider the size of the audit committee to optimize its effectiveness in addressing fraudulent financial reporting. Lastly, Organizations should establish mechanisms for continuous monitoring and evaluation of the audit committee's performance. Regular assessments of the committee's effectiveness in detecting and preventing fraudulent financial reporting can help identify areas for improvement.